Back to Glossary
Margin of Safety
The difference between a stock's intrinsic value and its market price, providing a buffer against error.
Margin of Safety
Coined by Benjamin Graham, the margin of safety is the cornerstone of value investing.
Concept
If you estimate a stock's intrinsic value at $100 and buy it at $70, your margin of safety is 30%. This buffer protects you if your analysis contains errors.
Why it matters
- Valuation is imprecise: Even careful analysis involves assumptions
- Unexpected events happen: Recessions, competitive disruptions, management mistakes
- Limits downside risk: The larger the margin, the less you can lose if you're wrong
How much margin is enough?
- Conservative investors: 30–50% discount to intrinsic value
- Moderate approach: 20–30% discount
- Growth investors: May accept smaller margins for high-confidence ideas
Practical application
- Estimate intrinsic value using multiple methods (DCF, comparable multiples)
- Average or take the conservative estimate
- Only buy if the current price offers sufficient margin
- If the stock rises to intrinsic value, consider trimming the position
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Valuation
Difficulty
Beginner
Reading Time
1 min
Related Terms
Book Value
Net asset value calculated as total assets minus total liabi...
P/E Ratio
Price-to-earnings ratio, a common valuation metric.
Price-to-Sales Ratio
A valuation metric comparing a company's stock price to its...
EV/EBITDA
Enterprise value divided by EBITDA, used to compare companie...
Price-to-Book Ratio
Compares a stock's market price to its book value per share.
Learn More
Where You'll See This
This concept appears throughout stock detail pages and financial data.